You’re determined that this will be the year you finally pay down (or pay off) that debt. Get ready, because every month, our Do It Today plan will have you taking another step on your journey toward living a debt-free life.
Step 1: Take Stock of Your Debt
First, sit down and take stock of all your debts. Don’t let the numbers scare you; you need to do this to move forward. Get out every single credit card bill, personal loan, student loan, and any other debt you’re carrying (except your car and mortgage payments). Tally up the numbers to give yourself an idea of what you’re dealing with.
Next, organize your debt into different categories, such as credit card debt, student debt, personal loans etc. Use a spreadsheet to list your debt, the remaining term of each loan (if applicable), the minimum payment and the interest rate.
Finally, designate one hour each week for working on your finances.
Step 2: Don’t Dig Yourself Deeper
When you’ve dug yourself deep into a pit, the only way to get out is to stop digging. This month, focus on not racking up more debt. Stop using your credit cards. Skip your weekly trips that usually have you buying too many non-essentials.
Instead, start brown-bagging your work lunch and brewing your own coffee. Get into the habit of spending only on essentials so you can make real progress toward paying down that debt.
Don’t forget to make the minimum payments on every line of credit and loan you have open. Neglecting your debt will only pull you deeper into the pit.
Step 3: Negotiate a Lower APR
f the majority of your outstanding debt is credit card debt, you may be spending hundreds of dollars just on interest alone. Aside from wasting money, this keeps you from moving forward and paying down your debt.
Most people don’t know you can call up a credit card company and negotiate for a lower APR. Take the time this month to do that. Explain that you are working on paying down your debt and that the interest payments are impeding your progress. You can even research competing cards and cite their interest rates in a bid for a lower APR from your current credit card company.
Lowering your interest rates will allow you to make another real step toward getting rid of debt.
Step 4: Create An Emergency Fund
You may be feeling impatient to start more aggressively paying down debt, but it’s important to first create an emergency fund. If you don’t have money socked away for unexpected expenses, you’ll be tempted to use the money that’s already earmarked for your debt payments to fund this expense.
Experts recommend keeping three months’ worth of living expenses in an emergency fund, but you can start with a modest $1,000. Set up an automatic monthly or weekly transfer from your Checking Account to your Savings Account until you have a fully padded emergency fund. This may take several months, but no worries, you can continue following the next few steps toward a debt-free life as your emergency fund grows.
Step 5: Create A Budget
This month, you’re going to organize your finances. Hold onto every receipt, bill, paystub and invoice you produce throughout the month. Sometime during the last week of May, sit down with all of your paperwork and start crunching the numbers.
When you’re through, you should have all of these questions answered:
- How much is my net monthly income?
- How much are my monthly fixed expenses?
- How much are my monthly non-fixed expenses?
Now that you have the numbers in front of you, work on creating a budget. Designate the necessary funds for your fixed expenses. Then, with the remaining money, determine how much you will spend in each non-fixed expense category; like groceries, clothing, entertainment, etc.
Put your minimum debt payments in the fixed-expenses category, with another category for extra debt payments in your column of non-fixed expenses.
Step 6: Trim Expenses
Now that we have a budget, let’s slim it down!
You’ve already practiced spending less thanks to Step 2 in this series. Now, it’s time to get serious about it. Take a long, hard look at the money you spend each month and find your weak spots. Where do you spend the most on unnecessary purchases? What’s your particular vice? You may even have several spending traps. How can you cut back on you daily expenses?
Any extra money you save goes toward your debt payments.
Step 7: Create A Debt Snowball
You’ve organized your debt, you’ve set up an emergency fund and you’re working on spending less. You’re now ready to start getting rid of that debt — for good!
Choose the debt you’d like to pay down first. Financial expert Dave Ramsey suggests starting from the smallest debt and working your way up. You can also choose to start with the debt that carries the highest interest rate. Either way, once you’ve paid down the first loan or line of credit, you’ll move onto the next and continue to work your way through all remaining debt until you’re completely debt-free.
For now, paying off this debt will be your top priority. Be sure to pay the minimum payments on all other debts, but any extra money you have at the end of the month goes toward the first one. Start with the minimum payments you were making anyway, and add the money that was previously going toward setting up your savings account to create your debt snowball. Whenever possible, try to add money to your snowball to accelerate your progress.
Doesn’t this feel great? You’re on your way to a debt-free life!
Step 8: Boost Your Income
Increase your income this month to help you pay down debt.
There are a handful of practical ways to accomplish this. For instance, consider asking for a raise or promotion at your current workplace or seeking employment elsewhere if you feel you’ve reached your maximum earning potential at the company. You can also freelance for hire, take on a side job on weekends or a seasonal job for just a few weeks a year. You might also consider offering consulting services in your particular field.
Remember: any extra money earned goes straight towards your debt snowball!
Step 9: Put All Windfalls In Your Snowball
Let your debt snowball grow by packing it with all your unexpected windfalls. Seasonal bonus at work? Add all or most of it to your snowball. Unexpected refund? Let it go toward paying down your debt. Birthday gift money from Great Aunt Sally? You know where it’s going!
It isn’t easy to say goodbye to an unexpected windfall, but all that extra money will help you reach your goal that much sooner.
Step 10: Make It Automatic
Now that you’re maximizing your payments toward the debt you’ve prioritized, make sure it happens by automating your payments. Set up an automatic transfer in your designated amount from your checking account or your savings account to that debt each month, and it will be well on its way to disappearing!
Step 11: Track Your Progress
Update every bit of progress you make on the debt spreadsheet you created earlier this year. Keep your spreadsheet in a visible place so you can quickly and frequently track your progress.
Watching those numbers shrink will give you the motivation you need to work harder and make it all happen quicker. Just imagine; one day, you won’t owe anyone a single dollar!
Step 12: Celebrate!
Is your debt shrinking? Have you gotten rid of one of your outstanding loans or lines of credit? Well, then it’s time to celebrate!
Take the time, this month, to celebrate every small goal you’ve reached on your journey toward paying down debt. You don’t need to spend much to celebrate an achievement; find inexpensive or even cost-free ways to reward yourself.
Celebrate big. You deserve it!
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